美國運通 (AXP) 2006 Q4 法說會逐字稿

Good afternoon.

My name is Chris, and I will be your conference facilitator today.

At this time I would like to welcome everyone to the American Express fourth quarter 2006 earnings conference call. (OPERATOR INSTRUCTIONS).

I would now like to turn the call over to our host, Ron Stovall.

Thank you.

Mr. Stovall, you may begin your conference, sir.

Welcome to everyone.

We appreciate all of you joining us for today's discussion.

As usual, it is my job before we start the call to remind you that the discussion today contains certain forward-looking statements about the Company's future financial performance and business prospects, which are subject to risks and uncertainties and speak only as of today.

The words believe, expect, anticipate, optimistic, contend, plan, aim, will, should, could, likely and similar expressions are intended to identify forward-looking statements.

Factors that could cause actual results to differ materially from these forward-looking statements, including the Company's financial and other goals, are set forth within today's earnings press release, which was filed in an 8-K report, and in the Company's 2005 10-K report already on file with the Securities and Exchange Commission.

In the fourth quarter 2006 earnings release and supplement, which are now posted on our website at IR.AmericanExpress.com and on file with the SEC in an 8-K report, we have provided information that compares and reconciles the Company's managed basis financial measures with the GAAP financial information.

And we explain why these presentations are useful to management and to investors.

We urge you to review that information in conjunction with today's discussion.

Gary Crittenden, the Executive Vice President and Chief Financial Officer of American Express, will provide some introductory remarks, highlighting the key points related to today's announcement.

Once he completes his remarks, we will turn to the moderator who will announce your opportunity to get into the queue for the Q&A period.

Up until then no one is actually registered to ask questions.

While we will attempt to respond to as many of your questions as possible before we end the call, we do have a limited amount of time.

Based on this, we ask that you limit yourself to one question at a time during the Q&A.

But before we begin, I would like to address an important future change to our earnings announcement process.

Starting with the first quarter 2007 earnings announcement, we will be revising the timing of our earnings release and supplement distribution.

As you know, historically we have announced earnings and distributed our documents during market hours.

However, based on our ongoing evaluation of how to best serve both the institutional and individual investor community, in April we plan to release our first quarter earnings announcement shortly after the market close, and make the two documents available to you as soon as possible after the announcement.

As we do now, we will then begin the earnings conference call at 5:00.

With that, let me turn the discussion over to Gary.

Thank you all for joining with us today.

As usual, my remarks today will focus on our results for the fourth quarter, as you are already familiar with our results for the first three quarters of the year.

However, during the Q&A session I will be happy to respond to any questions you might have on our full year results, in addition to the questions you might have for the fourth quarter.

As you have seen in the earnings documents that we distributed earlier today, our fourth quarter results reflect a continuation of the strong momentum we reported throughout 2005 and the first three quarters of 2006, in addition to the ongoing benefits of our investments in a broad range of business building initiatives.

When you compare our financial results from continuing operations for the fourth quarter to last year's results, net revenues grew 13%, income increased 23%, and diluted EPS of $0.76 rose by 27%.

In addition, return on equity by for the prior 12 months rose to 35%.

As you know, during the quarter we raised our return on equity target to the 33 to 36% range.

The new target represents an increase from the prior range of 28 to 30%, which was increased in 2005 from the previous 18 to 20% range in anticipation of the spinoff of Ameriprise.

By raising this target again, one year subsequent to the spinoff, we are acknowledging our confidence in the unique financial characteristics of the Company's spend-centric model, in addition to our ability to generate strong returns as demonstrated by the return on equity levels we have achieved over the past few quarters.

On average and over time targets of at least 8% revenue growth and 12 to 15% earnings per share growth remain unchanged.

The quarter's results included $68 million, or $42 million after-tax, of gains related to the rebalancing of the investment portfolio within the Travelers Cheque business.

The gains are reflected within the U.S.

Card Services segment where they provided the opportunity for us to further increase marketing and promotion spending.

The rebalancing has enabled us to better align the maturity profile of the Travelers Cheque and Gift Card investment portfolio with the TC business' liquidity needs.

Certain call figures in some of the municipal bonds within the investment portfolio were expected to accelerate their redemptions, which would have caused anticipated total bond proceeds in certain years to exceed the business' forecasted liquidity needs.

As a result, we sold some of the bonds with anticipated maturities in years which proceeds would exceed business needs, which resulted in the gain.

And then reinvested their principal into longer-term securities.

From an economic standpoint this rebalancing was net present value positive, and did not have a significant impact on the overall investment revenue from the portfolio.

In addition, while the new securities have a somewhat lower average yield than the bonds that we sold, we felt that current long-term municipal bond rates are at levels versus historical trends that provide us with an appropriate yield over the long-term.

This year's quarter also included a substantial benefit related to lower credit-related write-offs versus last year in the U.S. when bankruptcy filings rose as a result of the October 2005 bankruptcy legislation.

In addition, both quarters included reengineering costs which totaled $64 million pretax, or $42 million after-tax, this year versus $65 million, or $42 million after-tax, last year.

During the quarter we returned 84%, and year-to-date 93% of total capital generated to our shareholders through share repurchases and dividends.

We repurchased a higher level of shares this quarter versus last year as our activity was reduced last year in light of the capital implications of the Ameriprise spinoff.

Since 1994 we have returned 69% of the capital generated to shareholders, which is above our 65% long-term target.

With regards to our results, the strong revenue growth in the quarter reflects increases in discount revenue, cardmember lending net finance charge revenue and other card-related revenue, all of which reflect the excellent spending, lending and current in-force growth achieved during the quarter.

As a reminder, our consolidated revenues of $7.2 billion in the quarter are reported on a GAAP basis.

Therefore, for those who want to understand the Company's revenues from a managed perspective, you would need to add the U.S.

Card Services' GAAP to managed adjustments.

On that basis you would see fourth quarter revenues of $7.4 billion, a number in line with the level and method that some of you use in your models.

Billed business growth remained strong, as each of our customer segments in major geographic regions contributed to our card-related metric growth.

Worldwide billed business increased 16% versus last year on a reported basis, and 14% after adjusting for foreign exchange.

In our U.S. proprietary business consumer spending grew 11%, small-business spending rose 15%, and corporate services volume improved by 11%.

In total, U.S. non-T&E related volumes, which represented approximately 71% of U.S. billings grew 14%, while T&E related spending rose 10%.

Outside the U.S. the proprietary billed business growth was 8% on a foreign exchange adjusted basis, as we saw 6% growth within our consumer and small-business activities, and 15% growth within corporate services volumes.

As you know, these proprietary card comparisons outside the U.S. are negatively affected by the sale and transfer of our Brazilian operations in the second quarter of 2006, and our Malaysian and Indonesian activities in the third quarter of 2006 to three Global Network Services bank partners.

Excluding the impact of the sales, the underlying proprietary card metrics continue to be strong as we achieved 13% foreign exchange adjusted growth outside the U.S., reflecting double-digit growth in all of our major geographic regions.

This strength is not fully evident within ICGCS in addition to the sales.

The segment's revenue and net -- the segment's revenue and income growth was negatively impacted by the international banks results, which continued to be pressured by interest rate and the challenging corporate travel environment.

Finally, within Global Network Services billed business rose 67%, driven by continued triple-digit growth within the U.S., as well as robust growth outside the U.S.

Excluding the impact of the transfer of cards and spending associated with the independent operator agreements we established with Brazil, Malaysia and Indonesia, GNS billed business growth was up 44%.

Worldwide cards in-force rose 10%.

We added 1.5 million net new cards during the quarter, and 7 million net new cards since last year, reflecting 4% growth versus last year in proprietary cards, and 39% growth in network partner cards.

If you adjust for the 1.5 million cards that were transferred from the proprietary international card business to GNS as a result of the market sales, proprietary card growth worldwide was 7%, and the network card growth was 25%.

Despite the strong growth in cards in-force an a slightly higher average fee per card, our net card fee revenue decreased 8% this quarter.

Consistent with last quarter this reflects the reclassification, effective July 1, 2006, of certain card acquisition-related costs which are now reported as contra revenue within the net card fee line, rather than as an operated -- rather than as operating expenses.

This reclassification suppressed total revenue growth by approximately 1%, but had no effect on net income, and is not included in the average fee per card calculation.

Spending for proprietary basic card grew 7% worldwide, despite the depressing effect of the substantial card additions over the last few years.

On average, discount rate remains flat to last year at 2.55%.

And consistent with seasonal patterns, declined 2 basis points versus last quarter.

While the longer-term rate trend continues to reflect the negative impact from selective repricing initiatives, and ongoing changes in the mix of spending between various merchant categories, the rate has been buoyed more recently by the fact that in some merchant segments repricing activities have had a positive effect on the recognition of substantial value that we bring to those merchants.

Worldwide lending balances on an owned basis rose 31%.

On a managed basis balances grew 17%, on 17% growth in both the U.S. and non-U.S. portfolios.

On a managed basis the net worldwide finance charge revenue as a percentage of average loans increased versus last year, but declined versus last quarter.

Securitization income rose 18%, as higher portfolio yield and lower write-offs were partially offset by greater interest expense and a lower-level of securitized assets.

Travel commissions and fees increased 3%, reflecting a 6% increase in travel sales, a moderately lower transaction level, and lower average revenue per transaction due in part to the ongoing transition to online booking.

U.S. consumer travel sales continued to grow rapidly, increasing 26%.

And global and international consumer sales rose 4%.

Despite a relatively flat level of employees versus last year, Human Resource expenses increased 14% due to merit increases, greater incentive and benefits costs, and higher severance-related costs this year.

Marketing, promotion, rewards and cardmember services costs increased 10%, reflecting greater rewards costs and higher marketing and promotion expenses.

Marketing expenses continue to reflect relatively high levels of spending related to various business building initiatives, but lower costs related to the Company's ongoing "My Life, My Card" advertising campaign, which was in a particularly active phase last year at this time.

Increases in rewards costs continue to reflect strong spending growth, higher redemption rate, and increasing cardmember participation.

The total provision for losses and benefits increased 10% as the lending and other provisions increased by 17% and 20%, respectively, partially offset by a 4% decline in the charge provision.

The increase in the lending provision was driven by higher loan loss -- by higher loan volumes globally, partially offset by the favorable impact of the lower bankruptcy-related charge-offs and strong credit quality in the U.S.

While higher loan volumes have also driven greater reserves year-over-year, reserve coverage of past due accounts fell slightly below 100%, reflecting improved credit trends within the portfolio over the duration of the model measurement period of 24 months.

The charge card provision decline reflects a lower loss rate and improved results within our collection activities in the U.S., partially offset by higher volumes worldwide.

The increase in the investment certificate and other provision was mostly due to higher merchant-related provisions.

Interest expense increased 36% versus last year, driven by higher funding costs and a greater average receivable balance.

Given the growth in the remaining operating expenses, it reflects the impact of increased volumes within our technology and cardmember servicing activities.

The consolidated tax rate of 24% for the quarter increased from 22% last year.

Last year's lower effective tax rate reflected a $60 million benefit, primarily related to the finalization of state tax returns.

This year's rate reflects tax benefits totaling $52 million that relate principally to certain foreign losses, in addition to the finalization of state tax returns.

With that, let me conclude with a few final comments.

We again delivered strong revenue and earnings growth during the quarter, while continuing to invest in the business and maintaining substantial balance sheet strength.

The quarter's results continue to illustrate healthy momentum throughout our proprietary payments business.

In addition, growth within our network business accelerated, even if you exclude the benefits of Brazil, Malaysia and Indonesia -- even if you exclude the benefits of those agreements that we completed earlier this year.

Despite an environment characterized by a heightened level of competitive activity, our industry position continues to be strong, as growth in our cardmember spending and borrowing was at the top tier of the industry, and our credit metric continued to demonstrate best in class credit quality.

Furthermore, our position among affluent cardmembers and high spenders is well-established and is supported by our focus on levering our direct merchant relationships, the unique information benefits of our closed loop network, and our attractive Rewards programs to deliver premium, differentiated offerings to our customers, while driving incremental spend to our merchants.

We believe these advantages and our position within the marketplace are not easily replicated by our competitors.

We're also very optimistic about the broad growth opportunities within the payment industry.

We have spoken to you in the past about the plastic penetration upside that we see, given the relatively low levels of spending currently on plastic throughout the geographies and customer segments in which we operate.

Overall, we believe we are well-positioned to execute against this growth opportunity and our financial targets.

However, we're also cognizant of the near-term growth challenges within the environment.

As we have discussed with you previously, interest rate comparisons will be more difficult in early 2007, as a number of the hedges roll off at the end of last year.

In addition, the benefit -- the beneficial provision-related factors from the U.S. bankruptcy law change that we enjoyed in 2006 will likely have much less of an impact in 2007.

We expect these factors to results in uneven growth over the course of the year in these expense lines.

Therefore, we're intently focused on our expense levels quarter to quarter.

In particular, as you know, across all of our business we have made considerable efforts over recent years to implement flexible business plans, which position us to pull back on spending when required by external economic factors or business performance, or push forward if the environment permits.

These flexibility plans focus more on discretionary expense categories.

And given the interest and provision comparisons we face, we plan to take a more stringent approach with some of the discretionary expense areas in the first half of 2007.

In implementing these measures we, of course, will focus on minimizing any impact to the business' overall performance or growth.

And we are confident that the high prior year's levels of investment will continue to provide benefits to the business, mitigating the impact of the somewhat more conservative investment approach during the year.

In addition to these measures, to ensure that we are positioned to maximize our ability to invest in key growth opportunities, we remain focused on reengineering activities.

While this will likely generate reengineering-related expenses from period to period, it will position us to continue to effectively control underlying operating expense growth.

We also continue to leverage our investment and balance sheet optimization disciplines, which enable us to effectively maximize the efficiency with which we allocate capital, as well as invest in opportunities that should result in the greatest financial and strategic impact for the Company.

As we have discussed with you previously, we believe we have several very attractive areas of growth on the immediate horizon that both embody the spend-centric model and provide opportunity to drive plastic penetration, volume growth and marketshare.

In particular we will continue to focus on our GNS business in which we intend to continue to capitalize on the strong momentum, both within and outside the U.S., by working with bank partners to leverage the value and economics of our spend-centric model, and to drive high incremental spending on our network at very strong returns to the Company.

Our small business segment, particularly in the U.S. in which we have the market leadership position, which we will continue to protect and grow.

The average spend within this segment is particularly high, while industrywide small business spending is currently less than 15% penetrated by plastic.

The opportunities to capture incremental spending on our network, given additional plastic penetration, are thus considerable.

In addition, spend velocity and returns within this business are also particularly high, making it a very attractive segment on which to continue to focus.

Finally, our global middle market corporate business also represents a significant opportunity, given the high average spend, the opportunity for additional plastic penetration, and the strong ROE profile for this charge-oriented business.

In summary, our recent business success and our strong track record of renovation, product development, and customer-focused marketing makes us confident that we are positioned to continue to drive attractive growth and returns into the future.

Thank you very much for listening.

And I think, Chris, we're now ready to take questions.

(OPERATOR INSTRUCTIONS).

Robert Napoli.

I would like a few comments maybe on operating leverage in your business.

And maybe focus a little bit on GNS assets.

That business had 30% plus earnings growth on 15% revenue growth.

And I know there's a lot of other things going on in there, but I just wondered if you could -- I was hoping you could give a little more color.

You had 60% spending growth, 15% revenue growth, and 30% earnings growth for '06.

What does the longer-term outlook for that GNS business will be more normalized kinds of growth targets for that business?

And then if you could touch on the operating leverage generally in American Express.

Sure.

That segment, as you know, includes both our merchant acquisition business as well as our GNS business.

And it also is the business in which we record our brand advertising -- our corporate brand advertising.

And so as you mentioned, there are a number of cross currents there.

We feel really very positive about the progress of the GNS business itself.

As I mentioned, we had triple-digit growth in the U.S. and very strong growth outside the U.S.

And there is a lot of leverage associated with that income.

That is primarily fee income that we receive that comes from our partners as our partners ramp up on our network.

And obviously we feel good about the progress there and where we have come.

Our ES business also historically has shown pretty significant leverage.

Our network is largely in place.

We obviously invest in additional coverage over time, particularly outside the United States, but we have shown good leverage there from a cost perspective as our volumes has gone up.

And then finally we have brand advertising.

And we will -- branded advertising sometimes we're pushing ahead with that; sometimes we're spending more money on that, and sometimes we're spending less.

In this particular quarter we spent a little bit less on brand advertising, which doesn't mean we cut back on marketing overall.

In fact, if you look at the marketing line item -- so quarter-over-quarter we were up about $150 million from the third quarter to the fourth quarter.

If you take last year's fourth quarter to this year's fourth quarter, we were up about $150 million.

And fortunately we had the opportunity to be able to do that in this quarter and still reach what we had as our target from a financial perspective.

I think we had strong investment in marketing in spite of the fact that we had decided to pull back on brand advertising in the quarter.

Can you give any color on a longer-term growth target for that?

And you did have a merchant charge, which I didn't understand in the quarter.

We don't provide obviously any kind of segment guidance.

The best thing I can say is that history is a bit of a guide here.

I think what you might be referring to is that merchant provision was up a little bit in the quarter.

As we sometimes have expenses when a customer pays for something in advance and the service is not delivered to the customer.

Let's say, you go to a store and you buy furniture.

For whatever reason, the furniture retailer goes bankrupt.

Generally as a Company policy, it is not a written policy, but as a Company policy from a customer service perspective, we make good on that purchase for the customer.

From time to time we make changes in that provision based on what we see the risk in the environment to be, and that is the number that you see there.

That was kind of a true up of a reserve or --?

You know, we look at that reserve each month.

And it just happened to be a month where we thought it was important to increase the reserve.

David Hochstim, Bear Stearns.

Could you talk in maybe a little more detail above the increase in marketing and promotion spending outside GNS, and what was driving that?

And then should we think of the -- part of the increase as offsetting the tax benefit, or where is that going to consider that operating earnings?

I honestly -- the way we thought about it is we decided to rebalance the Travelers Cheque portfolio as we went through the quarter.

And there were good reasons to do that based on what we thought the liquidity profile requirements of that were going to be during the quarter.

There was a gain that we had as result of that.

Independent of that, we looked at our marketing plan and we thought there was an opportunity for us to do some things in this quarter from a marketing perspective.

And so we stepped on that pedal pretty hard.

We listed our -- and hopefully you have seen some of that.

So we listed our marketing pretty heavily sequentially from the third quarter to the fourth quarter, and certainly year-over-year, particularly given the rapid run in marketing that we have had over the last couple of years, it was another big increase.

I don't really think in terms of offset.

But clearly marketing was an area where we made a pretty substantial investment this quarter compared to the other line items.

In terms of the composition in the spending, aside from the cut back on "My Life, My Card", what other kinds of things are in there?

And you had mentioned some benefit from merchants in terms of higher discount rates, but what kind of --?

If you look in the segment results, you can see that most of the spending took place in U.S.

MS, so most of it happened in the U.S.

Most of that additional spending took place within that segment.

It was a combination of customer acquisition spending, the normal kind of direct-mail -- drive people to the Web kind of spending, as well as product brand advertising, which is resident in that segment -- not in the third segment, not in the ES or the GNMS segment.

So that is most of what the advertising was in that -- in the quarter.

Chris Brendler, Stifel Nicolaus.

At least just give us a little more color on your comments at the end of your prepared remarks.

It sounded like you were thinking that there was -- or at least as you said today, looking at maybe spending levels, it won't be quite so healthy going forward.

You mentioned the corporate environment.

If I look at my model it looks like the corporate and the T&E sectors are the ones that are starting to slow just a little bit, and then maybe some better expense leverage going forward.

How do you feel about the outlook against -- for spending as you said today?

The way -- I think the way we think about this is we have made investments in -- I am going to talk about the expense side in a minute, and then I will talk about the spending side.

We have been investment over the last few years in our business that have given us a fair amount of of momentum, particularly I think when you compare us versus our competitors.

When I say that, you have to look at both our revenue momentum as well as our billed business momentum.

We have been fortunate that our billed business momentum has been strong and our revenue momentum has been strong.

And that I think has really differentiated us from our competitors.

We've got pretty good momentum going to this quarter.

As I mentioned, we did some additional spending from a marketing perspective in the fourth quarter that gives us good momentum as we go into to the first half of the year.

And in the first half of the year there are some challenging comparisons, both from an interest perspective -- interest rates were rising from the start of 2006 through the middle of 2006, and were up against those comparisons.

And then we have the year-over-year comparison in provision that is probably going to be higher than it was in 2006.

And so our hope is that with the very substantial number of new cards that we have added, 7 million new cards added during the course of the year, that we have good prospects for being able to have spending take place on those cards during the course of the year.

Obviously we will have to see how that evolves, but when I was talking about caution I think our caution is just more on the environmental comparisons from an expense perspective than anything in the environment itself.

I think we have seen a bit of a dip in spend.

Maybe two quarters ago we saw spending -- average spend dip down about 2%, both on the consumer and on the corporate side.

But it has held pretty consistent since then.

And so I don't think we feel any particular caution related to that right now relative to the trend.

But we do obviously acknowledge the fact that the expense and the provision comparisons are a little tougher in the first half.

One quick follow-up.

If you could address any impact on that outlook if Delta gets acquired by another carrier?

We have very little insight to begin with more than what you all read in the paper about anything might have been in that regard.

What I can tell you is that we have very strong relationships with Delta that have now endured many years.

And those relationships extend contractually forward for a number of years, as we have talked about on this call.

We anticipate having a very strong relationship with Delta for some time to come.

And whether that happens with or without a partner is difficult for us to talk about.

Craig Maurer, Soleil Securities.

I just wanted to ask a question about Gift Card sales this past quarter.

One, they were extremely robust, as we have seen in the news.

And I was wondering if you could talk a little bit about what we should expect in terms of spending from those Gift Cards coming back through American Express' network in the first quarter?

And two, if the extreme growth in sales of Gift Cards had any impact on your overall discount rate, as the bulk of those Gift Cards I would imagine were purchased at low discount rate locations?

Even though clearly they could have been bought on a Visa, I'm sure you saw plenty of Gift Card sales run through AMEX cards as well.

Yes.

This is a very, very large ship.

And even though our Gift Card performance was really very strong in the fourth quarter, that business is new enough that it just did not have a material impact on the Company today.

We were very pleased with what our Gift Card results were in the fourth quarter.

You have heard people talk about it for a while.

Fortunately this is a business that we have been in for a few years, and we feel very good about our product placement capability and the results that we generate in the quarter, but it really would not be significant enough compared to the vast bulk of business that is done on our charge and credit products to have a significant impact on our spending trends in the first quarter, on our discount rate in the fourth quarter in any of those categories.

Just one follow-up.

On the HR costs that were up pretty substantially in the quarter, just in terms of how we should look at seasonality in that line, is this the kind of growth we should expect in general in fourth quarters going forward, or was this -- would you view this as above and beyond what we should expect going forward?

Historically we really have controlled this line item extremely well.

And if you look at the underlying factor here obviously is people.

And our actual headcount in the quarter was very well-controlled.

We did have serially some increase in the headcount, but all of that increase essentially was dedicated in the customer service area -- front-line customer service jobs.

No real overhead additions that took place.

But the primary drivers here are a couple of things.

I mentioned severance cost.

We had roughly the same amount of restructuring in the fourth quarter this year as we had last year, but the percentage of that, the proportion that was severance-related was higher.

It was about $34 million in the fourth quarter that we just completed.

And then we obviously had a higher income growth in this quarter than we had had in earlier quarters during the year.

And our incentive calculations -- our incentive accruals go along with the income as it grows during the course of the year.

We had the things that I talked about, merit increases, somewhat accelerated increase in incentive payments, and then you had the severance on top of that, which all contributed to a somewhat anomalous increase in HR spending in this quarter.

Joel Houck, Wachovia.

The question is as it relates to worldwide growth in lending balances, that has obviously been much faster than your peers, and yet you have been able to hold the line on margin.

What is the outlook, if you will, in terms of that continued differentiation in '07?

And how do you guys feel about holding that 9.5% margin give or take 10 or 20 basis points?

I can't make a forecast obviously on what we think is going to happen to the margin.

The factor that has really been the primary driver of that is the fixed variable component of the portfolio.

About a year and half or so ago we took some actions that enabled us to move the percentage of the portfolio that was variably priced from about 40% of the total up to about 60% of the total.

That has really been very helpful to us as we have gone through these interest rate increases over time.

I think we are positioned fairly well.

Someone went back and did some analysis of what our net spreads look like compared to different levels of interest rates, compared to our competitors that I saw the other day.

And we have really done quite well.

As interest rates have come up that yield from us has tended to move up over time, which I think reflects our pricing ability there.

For others it is actually moved in the opposite direction.

Whether that correlation holds true that you can go back and prove prove historically, I won't make a forecast about.

But I can tell you that Al Kelly and Dan Henry and their team have done a very nice job I think in managing that mix of fixed and variable pricing.

Ed Groshans, Fox-Pitt Kelton.

I guess I just want to touch back on one -- that was the question regarding the Gift Cards.

I was under the impression that American Express cards all get the same interchange, but on that question I guess I was a little confused.

Does that get the same interchange as the other cards or is the interchange on that going to be lower -- on the discount rate, excuse me?

The interchange is lower.

The interchange on Gift Cards is lower.

It is lower?

That is the only product category where we have a lower interchange, but there is a lower interchange on Gift Card.

Have you discussed throughout the difference between that versus the discount rate of 255, is it --?

No, we really haven't.

But again, I can assure you that it is not a material impact on our discount revenue.

The 255 that we had in the quarter I think represents some very fine work done by Bill Glenn and his team to ensure that the value that we actually generate for our merchants is being realized, and help offset what has been historically kind of a downward trend in discount rate.

As I said in my comments, that is not something that we anticipate sustaining going forward.

We anticipate the historical measure there to be a pretty good guide for us.

But the differential on the Gift Card is just not significant.

It is does not enough volume compared to the base to have any material impact.

In the release today there was a discussion I guess about some change in pension accounting.

And I guess the way I read that is that there is going to be some expenses coming through going forward.

Is that just you have --?

It depends on what happens to the underlying assets.

This is not just something related to us, this is something all companies face.

We discussed it a little bit in the last 10-Q that we filed.

It essentially takes what has historically been an off-balance sheet liability and puts it as an on-balance sheet liability, if you happen to be in a net negative situation.

For us, our overall pension plan is relatively small compared to most companies.

And this happens to be the current unfunded, if you will, portion of the investment from a pure accounting standpoint.

If you actually look at the funding of the pension plans from an ERISA perspectives, so the actual cash that we might or might not have to put into the plan, our plan is very well funded.

It is funded over 100%.

So there is no cash implication of this.

This is an OCI, an other comprehensive income charge that is required to adopt this new accounting principle.

It goes onto the balance sheet as a pension liability.

And then will vary over time, depending on how the underlying assets actually perform as it comes through as actual pension expense.

Then also in the release today there was a discussion of cash backs and the cost there.

Can you address that?

It seems like cash back cards are fairly popular these days.

And I guess that is the first I saw where American Express actually talked about cash back having some -- I guess a bit of a drag on the discount revenue.

It is small.

And there is a little bit of confusion about this, so I think it is that you gave me a chance to answer the question.

We have obviously very strong billed business in the quarter.

If you go from billed business down to discount revenue, there are several things that impact that.

One is the thing you just mentioned.

So if we have been cash back rewards, which obviously are growing for us.

It is a very good product category.

We think we have an excellent product entry there, and has impacted the growth of others because of the success of our own cash back product.

Because of that, you do have a contra revenue item that impacts that line item.

But that has been the case for a while.

Second, as GNS grows and becomes more and more successful, obviously the spread between the billed business, which is calculated on a gross basis, and the discount revenue which we recover after our partners deduct the part of the payment that goes to them, causes that spread to widen as well.

So as the GNS business becomes more successful, which we hope it will over time, you're going to see a widening between those two numbers.

But fundamentally it is really quite strong.

Our underlying business is quite strong.

Again, I think one of the things that we can feel best about our performances is how strong our revenue growth has been.

That while others have struggled, both with the yield against their receivables, and have struggled bringing much of their billed business into discount revenue, we really have not had that issue.

We have been able to convert fairly well from billed business and from receivables growth into revenue based on the things that we have been talking about.

I did notice that.

It seemed like, I guess, roughly -- I don't know how American Express looks at it, but it looked like the ratio of discount revenue to your billed business was kind of like 90% in years past.

I guess I would think that would look like it was about 88% now.

Will we see sort of that acceleration go as long as the GNS keeps growing faster?

I haven't actually looked at the exact calculation myself, so I don't know if those numbers are specifically correct.

But certainly the growth and success of GNS will contribute to a widening between billed business growth and our discount revenue growth, assuming that GNS outgrows the rest of the business.

Meredith Whitney, CIBC World Markets.

This is Carla calling in for Meredith.

She is traveling.

Looking at your card growth, I know you mentioned it was $1.5 million in the quarter, but only $200,000 of that came from the U.S.

And we're assuming that has something to do with the sale of the businesses from Malaysia and Brazil and Indonesia.

I was just wondering if you could give us some more clarity as to what the growth increase in cards would be outside of the U.S. before those sales?

Absolutely.

There was some impact from Malaysia and Indonesia, although that was relatively small.

The bigger factor was that we had a portfolio in GNS that we had around for that we -- we have had around for quite a while going back into the late '90s.

That really wasn't a successful portfolio.

And we decided in conjunction with our partner that we would basically closeout that portfolio.

And that took out, I think, something like 500,000 cards in the quarter.

So you actually could add that onto the card growth.

We debated back and forth about whether we should do it or not.

But I think the right way to present it is the way we did it.

Those cards, in fact, have been taken out of our base, and appropriately are presented in the way we described it.

But it does give the appearance of a suppressed card growth outside the U.S. that I don't think is accurate.

Sanjay Sakhrani, KBW.

Just a quick question.

I guess just the illusion of a suppressed growth, was that true of also the discount revenue and the net card fee revenue in the Internet -- international side?

The discount revenue certainly would be.

The net card fee on the international side is really also related to a note that we have in the supplement.

We have now -- there is now a few items that we account for as contra revenue that go against card fee income.

And that hits that international segment particularly hard.

So there is some deferred acquisition cost associated with acquiring cards.

There is the related commissions.

In some countries outside the U.S. we have commissioned salespeople, and those commissions go as contra revenue against that category.

And then there is some plastic costs that goes as contra revenue against revenue, particularly internationally.

That was a change that we made in our accounting, I think, on July 1 of this year.

You see it most pronounced in that segment.

But it is impactful enough to have about a 1% impact on the Company overall.

So once we lap that in July of next year, you won't see that obviously.

That will become a year-over-year comparable.

But right now it does standout a little bit as a pretty pronounced item.

Aside from that 1% impact related to the accounting change, I guess in the previous year's quarter you don't have discount fee income from the Malaysia and Brazil operations?

That's right.

Thank you.

Let me just make sure that I answered that in the correct way.

It was in our proprietary business, now it is in our GNS business.

So that income would have shifted over to our GNS business.

Okay.

I was just looking at the international segment.

So it would be out of that segment.

So it is out of that segment and now in GNMS.

Bruce Harting, Lehman Brothers.

Professional services expense was up about $120 million link quarter.

Is that a seasonal?

I noticed that it dipped 2 and 3Q and was higher in 4Q last year as well.

Is that the IBM outsourcing?

And then I guess you covered the GNS discount revenue issue as to how much of that is attributed to interchange from partners versus merchant acquiring fees.

Then finally, can you just size the China opportunity?

I see in your release today you're saying you released the first branded corporate card there with ICBC.

They obviously came public.

You hear all these amazing statistics about how much R&D is going on in China, what percentage of top five economy now, 60 airports being built.

But yet I don't hear anyone really sizing the credit card component out of that market.

Maybe you can just talk about the opportunity and what you are doing over there.

I would be happy to.

You are absolutely correct on the seasonality of this number.

It clearly does have seasonality associated with it.

If you go back and look at the serial growth, what you see is in the fourth quarter of every year we have a pretty sizable jump in that professional services line.

There are a number of things that are in there.

You correctly identified the IBM outsourcing arrangement is in there.

It also includes, if we have a special effort on around credit and collections, the commissions that we pay associated with that go into that.

It is where we capture any litigation expenses that we have as a Company.

That goes into that line item.

And historically the fourth quarter is a quarter where that typically looks like it bumps up a bit.

I think that is what you're seeing there.

With regards to China, we actually feel quite bullish about it.

As you correctly said, we have a partnership there with ICBC.

We have been very pleased with the initial phases of that partnership.

And we did launch our corporate card product with them, I think, in the month of October, the first month of the fourth quarter.

The opportunity for credit cards in China is limited somewhat by the -- I'm talking about inside China itself -- by the discount rate.

So the discount rate for credit cards in China is relatively low, and would be akin to the discount rate in France or the discount rate in Korea.

The bigger opportunity, at least in the near-term, unless there's something that the Chinese government does to modify their view on that discount rate, is for Chinese traveling outside the country who take their American Express cards and use them to spend outside the country.

And we think that is a very sizable and growing market.

So we obviously feel it is important for us to be there.

We feel very good about our relationship with ICBC, and hope that over time that relationship will only grow and flourish with them.

They are a very professional organization.

We have been impressed by our interactions with them.

And really do believe that they are a partner that could help us get very significant card placement in the country.

And as a result of that, benefit from a lot of out spend outside of China.

What is the discount rate there (indiscernible)?

I know, but I wouldn't want to be the one that is quoted as giving the exact number.

It is akin to what you would see in France or Korea.

Eric Wasserstrom, UBS.

I know you have touched on this several times already, but just to get back to the expenses, in particular the HR expense.

Those items sounded more -- I recognize that there was a confluence of events in the period, but they sounded as much seasonal as -- or I should say maybe more seasonal than non-recurring.

Is that a correct interpretation?

And if so, then how do we think about what the true baseline of expenses is heading into next year?

There's a couple of things that are going to influence what happens next year.

I mentioned obviously severance.

And so we took a severance charge in the fourth quarter, and that is going to positively impact our HR expense as we go through the various quarters next year with some actions that we took during the fourth quarter of 2006.

We've then had normal merit increases, which will take place and that has impact.

Then obviously as the business performs during the year, we accrue incentive at different rates.

If you have a quarter where you are up 25 or 30%, you would accrue more incentive than a quarter -- proportionately, than a quarter where you might be up 5 or 8 or 9%.

Because your estimate of what you think you're going to earn on a full year basis will change.

And that happened to be the case in this quarter.

And then that got compounded by the fact that we spent the severance in the quarter.

That is unlikely to be repeated as well.

We spent some money that we are unlikely to spend.

We're going to get some benefit from that spending as we go into next year.

I think we will have the normal merit increases that you normally see us have as we go through the year next year.

And the incentive thing just happened to be the way the income fell in the quarter.

And again next year would be in a different quarter, depending on how the income is earned as we go through the quarter next year.

We did, however, add some people during the quarter.

About 1,200 people, I think, that were added during the quarter, primarily customer service-oriented people.

Those are good investments from our perspective and wise things for us to do.

But I think generally we have been very good at managing that cost, and we will probably continue to have that same expertise, I would think.

Just as I think about where exactly the operating leverage derives from heading into next year, where are like the most obvious categories of that?

We always talk about a flexible business model.

And the easiest things to move on are things like travel, travel expenses, consulting expenditures, the parts of our marketing expenditures that are not as directly related to placing cards in the hands of people.

And those are the things that we move on first.

We have, what I believe, is a really excellent process internally that allows us to know for the investments that we make from a marketing and for many of our technology investments, what the return is that we expect for making those investments.

It allows us to take the lowest return on investments, if that is the environment.

Cut off those lowest returning investments without harming the overall underlying momentum of the business.

That is how we think about it.

We start with the most discretionary things first, which includes travel and consulting expenditures and things like that.

We then move to the least impactful marketing items.

And we try and manage this very carefully.

And we manage it month-to-month.

If the trajectory changes in any major expense category, so in prior years we have had a windfall that would happen from provision expense, or we might get a tax recovery, or we might have gotten an insurance recovery.

Or if something like that happens, on relatively short notice we can change the direction and make investments -- in part somewhat as we did in this quarter where we had this opportunity that was created by the Travelers Cheque gain.

It at least meant there was some flexibility to think about some additional marketing dollars in the quarter.

I think you're going to see us continue to follow that pattern of carefully managing our expenses.

And when we have opportunities that come along to increase the investment spending to maintain the overall momentum of the business.

Brad Ball, Citigroup.

I guess as a follow-up, I think this was asked earlier, but I don't think you've got the response.

In terms of the lending receivables growth in the quarter, can you give us a sense as to where you're saying the most traction, what products?

Describe again the link between spending and lending to give us a sense to whether this is sustainable?

Will you sustain the growth rates that are above the industry?

It is interesting that our growth rate, and this may be the first time this year, but our growth rate internationally and domestically was exactly the same.

Outside the U.S. the primary lead product is a high spending kind of relatively attractively priced lending product that is targeted on high spending customers.

And that is being rolled out in most of our major markets outside the U.S.

And that product is doing exceptionally well.

It is doing very well in driving I believe that result internationally.

Domestically, as I have said in prior calls, we developed under Ash Gupta's leadership really some very good capability to make judgments about where you can extend credit line wisely and where you can't.

Looking at the full set of factors about customers, how indebted they are on other products, the way they pay us on other products they might have with us, their total size of wallet compared to the amount of indebtedness that they have to us.

We have developed a lot of intelligence about how to use that credit line wisely.

Expand it rapidly, contract it when we need to contract it.

We have developed a lot of capability in that regard.

And that has really enabled us to fuel very good growth on the lending side to match with our billed business growth.

We have now sustained that, as you have seen, for awhile.

Now I wouldn't want to give you the sense that that is sustainable forever into the future.

We wouldn't make a forecast like that.

But we do feel good about how those products are performing.

Costco continues to perform very well.

Our Blue product is performing well.

You see the impact of Blue cash on a contra revenue item that I talked about just a minute ago.

Our small-business lending product is doing very well.

There is a pretty good list of things that are doing well.

I think an important factor here is that we really have not been relying on 0% balance transfer.

In fact, that number for us just keeps coming down.

And that has been one of the contributors to the -- to being able to sustain our yield as the 0% kind of balance transfer business becomes a smaller and smaller portion of what we do.

It really is kind of a broad-based improvement in our business based on I believe a real in-depth understanding of what the capacity is of our customers to repay us.

Obviously, it is being reflected in the credit performance.

The credit performance has been really outstanding.

And obviously -- and that is driven by our actual results over the last 24 months.

Just so I understand.

You're extending lines to certain customers within your existing lending categories, but it is not necessarily big growth in charge customers that are now taking on loans?

Well, we do have a lend on charge products (inaudible).

And I wouldn't want you to think that either.

We also -- we use that same intelligence to apply it to charge customers, and make sure that we're making the right bets.

I have said on a number of occasions that our objective is really not to minimize credit losses.

Our objective is to maximize net present value of our customers.

But I think we have been able to really do that without suffering significantly from a credit loss perspective.

We really have been -- it really has performed quite well.

I think it is a whole series of capabilities, which Ash and his team have brought together, that is providing us good insight.

These same insights, by the way, are the things that we're using for driving the closed loop network.

For understanding what a customer's ability is to spend, and ensuring that we're providing the right offers to those people.

That same capability -- the flip side of that is judging what their loan capacity is, what they are receivable capacity is.

What is of proportion of 0% balance fees right now?

Nice try.

It continues to go down.

It really just quarter per quarter is going down.

At this time there are no further questions.

Are there any closing remarks, Mr. Stovall?

No.

Thank you Chris.

And thank you all very much for joining us on the call.

Thank you for participating in today's American Express fourth quarter earnings conference call.

You may now disconnect.